IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE CYAN, INC. STOCKHOLDERS CONSOLIDATED
LITIGATION C.A. No. 11027-CB
MEMORANDUM OPINION
Date Submitted: February 7, 2017
Date Decided: May 11, 2017
Michael Van Gorder, FARUQI & FARUQI, LLP, Wilmington, Delaware; Seth D.
Rigrodsky, Brian D. Long, Gina M. Serra, and Jeremy J. Riley, RIGRODSKY &
LONG, P.A., Wilmington, Delaware; Shane T. Rowley, LEVI & KORSINSKY
LLP, New York, New York, Attorneys for Plaintiffs.
Bradley D. Sorrels, Ian R. Liston, Andrew D. Berni, and Jessica A. Montellese,
WILSON SONSINI GOODRICH & ROSATI, PC, Wilmington, Delaware; Boris
Feldman and Ignacio E. Salceda, WILSON SONSINI GOODRICH & ROSATI, PC,
Palo Alto, California, Attorneys for Defendants Mark A. Floyd, Michael L. Hatfield,
Promod Haque, Paul A. Ferris, Michael J. Boustridge, Niel Ransom, and Robert E.
Switz.
BOUCHARD, C.
This action arises out of the merger of Cyan, Inc. and Ciena Corporation that
closed in August 2015. In exchange for their Cyan shares, the former stockholders
of Cyan received shares of Ciena common stock and cash that accounted for 89%
and 11%, respectively, of an estimated $335 million in merger consideration.
Plaintiffs identified a host of alleged disclosure deficiencies in Cyan’s proxy
statement, but they elected not to seek injunctive relief to cure any of them before
the stockholders’ meeting, and the transaction closed after receiving the approval of
98% of the shares that voted. Almost one year later, plaintiffs filed their current
complaint, advancing two claims.
Count I asserts that the members of Cyan’s board breached their fiduciary
duties in approving the merger, primarily on the theory that the directors were
motivated out of self-interest to bolster their indemnification rights in the face of a
pending securities litigation to partner Cyan with a company with “deeper pockets.”
Count II seeks equitable relief in the form of quasi-appraisal. Defendants moved to
dismiss both claims for failure to state a claim for relief. For the reasons explained
below, I conclude that both claims are without merit and the Complaint must be
dismissed.
Count I fails to state a claim for relief for two independent reasons. First,
because the merger consideration primarily consisted of stock in a publicly traded
company, the board’s approval of the transaction is presumptively governed by the
1
business judgment rule and plaintiffs have failed to plead sufficient facts to support
a reasonable inference that a majority of Cyan’s board was interested in the
transaction or acted in bad faith so as to sustain a non-exculpated claim for breach
of fiduciary duty. Second, a majority of disinterested stockholders of Cyan approved
the merger in a fully informed, uncoerced vote.
Dismissal of Count II logically follows from the dismissal of Count I. As this
Court has previously held, quasi-appraisal is simply a form of remedy, typically
sought to address disclosure deficiencies that are the product of a fiduciary breach.
Because plaintiffs have failed to identify any material misrepresentation or omission
in Cyan’s proxy statement, or to allege any other viable claim for a fiduciary breach,
there is no basis to impose a quasi-appraisal remedy in this case.
I. BACKGROUND
Unless noted otherwise, the facts recited in this opinion come from the
allegations of the Verified Third Amended Class Action Complaint (the
“Complaint”) and documents incorporated therein. Any additional facts are either
undisputed or subject to judicial notice.
A. The Parties and Relevant Non-Parties
Under an agreement and plan of merger dated May 3, 2015 (the “Merger
Agreement”), Ciena acquired all of the outstanding shares of Cyan in a merger
transaction with an enterprise value of approximately $335 million, net of estimated
2
cash (the “Merger”). Plaintiffs are individuals who allege they were stockholders of
Cyan at all relevant times.
Before the Merger, Cyan was a Delaware corporation with its principal
executive offices in California. Cyan provided various carrier-grade networking
solutions in North America, Asia, and Europe. Its common stock was traded on the
New York Stock Exchange under the symbol “CYNI.”
Ciena is a Delaware corporation focused on providing communications
networking solutions. Ciena’s common stock trades on the New York Stock
Exchange under the symbol “CIEN.”
Defendants were the seven members of Cyan’s board of directors who
approved the Merger. Two of them were members of management; the other five
were outside directors.
Defendant Mark A. Floyd was Cyan’s Chief Executive Officer and Chairman
of the Board, and served on Cyan’s three-member Strategic/Finance Committee.1
Defendant Michael L. Hatfield, a co-founder of Cyan, served as Cyan’s President.
Defendant Promod Haque was an outside director of Cyan. He also was the
senior managing partner and co-CEO of Norwest Venture Partners (“Norwest”),
which held 22.71% of Cyan’s outstanding shares and was Cyan’s largest stockholder
1
Floyd was removed from the Strategic/Finance Committee when the committee was
tasked with approving a convertible debt offering, discussed below, but he was re-
appointed in connection with the process that led to the Merger.
3
as of the date of the Merger Agreement. Haque had voting control and dispositive
power over Norwest’s holdings.
Defendant Paul A. Ferris was an outside director of Cyan and served on
Cyan’s Strategic/Finance Committee. He also was the general partner and managing
member of Azure Capital Partners (“Azure”). Azure was Cyan’s second largest
stockholder, holding 12.4% of the company’s outstanding shares when the Merger
closed. Ferris had voting and dispositive power over the shares Azure held.
Defendants Michael J. Boustridge, Niel Ransom, and Robert E. Switz were
the remaining members of the Cyan board. Each was an outside director. Switz
served on Cyan’s Strategic/Finance Committee.
B. The Securities Litigation in California
On April 1, 2014, two pension funds filed a securities class action in
California state court asserting violations of the Securities Act of 1933 in connection
with Cyan’s initial public offering in May 2013 (the “Securities Litigation”). The
defendants in the Securities Litigation include Cyan, the seven members of its board
of directors who are defendants in this action, Jefferies LLC, and several other firms
that served as underwriters for the IPO: Goldman, Sachs & Co., J.P. Morgan
Securities LLC, and Pacific Crest Securities LLC.
On or about May 18, 2015, a class was certified in the Securities Litigation
consisting of “[a]ll persons who purchased or otherwise acquired Cyan common
4
stock from May 9, 2013 to November 4, 2013, except for purchases or acquisitions
of non-registered shares in a private transaction,” and excluding certain affiliates of
the defendants in the Securities Litigation and any person who validly requests
exclusion from the class.2 The action remains pending as of the date of this opinion.
Cyan is obligated to indemnify Jefferies and the Cyan directors for damages that
could result from the Securities Litigation.
C. Cyan Issues Convertible Debt
On May 22, 2014, during a meeting of Cyan’s board of directors, management
informed the board that Cyan only had sufficient cash to survive through the second
quarter of 2015. Preliminary discussions with several potential lenders indicated
that Cyan might only be able to secure modestly more debt than what was available
at the time under its existing credit facility.
In early June 2014, Floyd (Cyan’s CEO) held discussions with representatives
of Jefferies concerning opportunities for Cyan to raise additional capital. On July 2
and again on July 23, representatives from Morgan Stanley & Co. LLC expressed
the view that it would be difficult for Cyan to raise additional capital absent one or
more key business developments, such as a major customer win.
2
Beaver Cty. Empls. Ret. Fund v. Cyan, Inc., No. CGC-14-538355 (Cal. Super. Ct. May
19, 2015) (ORDER).
5
On August 6, 2014, after having discussions with Morgan Stanley and
Jefferies, the Cyan board determined that Cyan could raise additional capital through
a convertible debt offering (the “Convertible Debt Offering”). By December 4,
2014, however, the board had not been able to secure sufficient commitments from
unaffiliated investors to satisfy certain minimum investment conditions for the
proposed Convertible Debt Offering. As a result, the two management directors on
Cyan’s board (Hatfield and Floyd), an investment firm controlled by one of its
outside directors (Norwest), and Jefferies agreed to invest in the offering in the
following amounts: $4 million, $2 million, $11 million, and approximately $5
million, respectively. The Convertible Debt Offering ultimately raised $50 million.
Under the indenture governing the convertible notes, if the notes are converted
in connection with a merger, the converting note holder would receive the same
consideration that a holder of the number of shares of Cyan common stock into
which such notes were convertible immediately before the merger would have been
entitled to receive in the merger, subject to the acquirer’s right to elect to pay cash
in lieu of issuing shares. The indenture also contained a “make-whole” provision
under which, for a certain period of time, the note holders could require a purchaser
6
to repurchase their convertible notes at 100% of the principal amount plus accrued
and unpaid interest if a “Fundamental Change” occurs.3
D. Cyan’s Financial Performance Improves
In 2014 and the first quarter of 2015, Cyan reported continuous revenue
growth and improving liquidity. It reported revenues of $19 million, $24.4 million,
$26.6 million, and $30.5 million for the first, second, third, and fourth fiscal quarters
of 2014, respectively, and $36 million in revenue for the first fiscal quarter of 2015.
As of March 31, 2015, Cyan had cash and cash equivalents on hand of $53.87
million.
By February 10, 2015, Cyan had received a $28 million purchase order from
its largest customer, Windstream Corporation. The Windstream order was expected
to be filled across the first three quarters of 2015, and management believed that
there could be a second round of orders from Windstream in the following months.
Management revised its internal revenue outlook for 2015 to incorporate the
Windstream order and its outlook for 2016 and 2017 based on Windstream and other
generally positive momentum in the business. Due to these developments,
3
More specifically, the proxy statement for the Merger explained that, under certain
circumstances, “Cyan will in addition to the other consideration payable or deliverable in
connection with such conversion make an interest make-whole payment to converting
holders equal to the sum of the present value of the remaining scheduled payments of
interest that would have been made on the convertible notes to be converted had such
convertible notes remained outstanding until December 15, 2017 computed using a
discount rate equal to 2%.” Compl. ¶ 47.
7
management prepared a 2015 momentum plan, which increased the 2015 revenue
projection above the level of the previously approved operating plan.
On April 6, 2015, Cyan’s board noted the company’s increased dependence
on Windstream. It also noted that United States government stimulus spending was
driving recent business activity in part, and that it was uncertain whether the
increased level of Windstream business could be sustained through all of 2015 and
2016.
E. Cyan Enters into a Merger Agreement with Ciena
During the same period when Cyan was conducting the Convertible Debt
Offering and its operational results were improving, it also explored potential
strategic opportunities with other companies. A sale process began around April
2014, when a third party contacted Cyan’s Chief Financial Officer to express its
interest in learning about Cyan’s business. On December 17, 2014, Cyan’s board
enlisted Jefferies’ assistance for the sale process.
During a meeting on January 27, 2015, Cyan’s management and the
Strategic/Finance Committee “discussed the fact that Jefferies had purchased, and
was still holding, $5.5 million of the Company’s 8% convertible notes and the
related warrants and, as such, would have an interest in the outcome of a strategic
8
transaction in addition [to] the fee arrangement in the advisory engagement.” 4 The
General Counsel of Cyan “noted that the Committee and, eventually the full Board,
would want to consider these factors in connection with evaluating the advice and,
if applicable, any fairness opinion by Jefferies.”5 The board also considered
Jefferies’ potential conflict of interest because of its status as a defendant in the
Securities Litigation, but ultimately decided to keep Jefferies involved in the sale
process.
On January 29, 2015, Hatfield learned that Ciena, which had been engaged in
discussions to acquire Cyan, would prefer him to stay with the company following
a transaction.
On April 9, 2015, Cyan’s General Counsel and representatives of its outside
counsel, Wilson Sonsini Goodrich & Rosati, P.C., participated in a call with
representatives of Ciena and its outside counsel, Hogan Lovells US LLP, to discuss
how Cyan’s outstanding convertible notes and warrants would be treated in a
proposed strategic transaction. Representatives of Hogan Lovells expressed Ciena’s
concern that the note holders’ security interests in Cyan’s assets and the negative
covenants in the convertible notes would continue to apply after the closing based
on the structure of the proposed transaction that was under consideration. They also
4
Compl. ¶ 52 (emphasis in original).
5
Compl. ¶ 52.
9
conveyed Ciena’s preference for the proposed transaction to be structured in a way
that would qualify as a “Fundamental Change,” which would cause the security
interests and the negative operating covenants to terminate after the closing.
Representatives of Hogan Lovells then discussed that a “Fundamental Change”
could be triggered in a transaction in which the consideration paid for Cyan common
stock was a mix of both cash and stock.
On April 18, 2015, representatives of Hogan Lovells participated in a call with
representatives of Wilson Sonsini to discuss Ciena’s requirement that the form of
merger consideration be adjusted to consist of both cash and stock so as to trigger a
“Fundamental Change” under the indenture for the convertible notes. On April 21,
representatives of Jefferies participated in a call with Ciena’s financial advisor,
Morgan Stanley, during which representatives of Morgan Stanley formally proposed
that the form of merger consideration Ciena was offering be changed from all stock
to a mix of 11% cash and 89% stock in order to trigger a “Fundamental Change.”
The stock component of the merger consideration would be measured by the value
of Ciena’s common stock at closing.
On April 26, 2015, Ciena provided a draft employment term sheet to Hatfield.
He then participated in a call with representatives of Ciena to review and discuss the
employment terms, as well as the terms of similar term sheets for eight other Cyan
employees that Ciena had identified during the due diligence process.
10
On April 28, 2015, the Strategic/Finance Committee decided that it would be
advisable to contact Houlihan Lokey Capital, Inc. for a second fairness opinion. On
April 30, during a board meeting, an attorney from Wilson Sonsini “made note of
the fact that certain members of the Board, and Jefferies, held convertible notes and
related warrants of the Company, the ownership of which could be interpreted as
creating a possible conflict of interest.”6
On April 29, and continuing through until a final term sheet was signed on
May 3, 2015, Hatfield, with the assistance of independent counsel, negotiated the
terms of his employment with representatives of Ciena.
On May 3, 2015, Houlihan Lokey rendered a fairness opinion concerning the
Merger. The board unanimously approved the Merger the same day.
On May 4, 2015, Ciena issued a press release announcing the Merger, which
stated in relevant part that:
HANOVER, Md. – May 4, 2015 – Ciena® Corporation (NYSE:
CIEN), the network specialist, has entered into a definitive agreement
to acquire Cyan Inc. (NYSE: CYNI), a leading provider of next-
generation software and platforms to enable open, agile and scalable
software-defined networks. Under the terms of the agreement, Ciena
will acquire all of the outstanding shares of Cyan in a cash and stock
transaction currently valued at approximately $400 million (or $335
million, net of estimated cash acquired) and inclusive of Cyan’s
outstanding convertible notes on an as-converted basis.
...
6
Compl. ¶ 105(d).
11
Transaction Terms and Timing
Upon the closing of the transaction, Cyan shareholders will receive
consideration equal to the value 0.224 shares of Ciena common stock
(89% of which will be delivered in Ciena common stock and 11% will
be delivered in cash based on the value of Ciena common stock at
closing). This exchange ratio represents $4.75 per share of Cyan
common stock, based on Ciena’s 20-day volume weighted average
price as of May 1, 2015. Based on the structure of the transaction,
Cyan’s outstanding warrants will be deemed to have been automatically
exercised upon closing. In addition, Ciena will also assume Cyan’s
outstanding equity awards.
In connection with the acquisition, Ciena will assume Cyan’s $50
million in outstanding principal amount of 8.0% Convertible Senior
Secured Notes due 2019. Under the terms of the indenture, for a period
following closing, the note holders may elect to convert such notes at
an increased conversion rate, or alternatively require that all or a portion
of their notes be purchased for cash at a purchase price equal to the
principal plus accrued interest. In the event that any note holders do
not make either such election, such notes will become obligations of
Ciena.7
F. Litigation Ensues and the Transaction Closes
Beginning on May 15, 2015, five purported class actions were filed in this
Court challenging the proposed transaction. On June 23, 2015, these five actions
were consolidated and co-lead counsel was appointed.
On June 26, Ciena filed an amendment to its Form S-4 Registration Statement
with the Securities and Exchange Commission, attaching Cyan’s preliminary proxy
7
Compl. ¶ 70.
12
statement (the “Proxy”).8 On June 30, Cyan filed a definitive proxy statement
recommending that Cyan’s stockholders vote in favor of the Merger.
In mid-July 2015, defendants made a voluntary production of documents to
plaintiffs’ counsel. On July 20, 2015, after reviewing the documents that were
produced to them, plaintiffs sent a letter to Cyan’s counsel demanding that Cyan
supplement its disclosures in the Proxy. Cyan declined to do so.
On July 31, 2015, stockholders of Cyan holding approximately 71% of Cyan’s
outstanding common stock voted to approve the Merger, with approximately 98%
of those voting expressing their approval.9 The Merger closed on August 3, 2015.
G. Procedural History
Plaintiffs’ initial complaint sought to enjoin the Merger. As noted above,
plaintiffs also demanded that Cyan supplement its Proxy before the stockholders’
meeting scheduled to consider the proposed merger, which request Cyan rebuffed.
8
See Liston Aff. Ex. 1. The Complaint refers to the preliminary proxy statement and the
definitive proxy statement interchangeably for purposes of the disclosure claims, and the
parties briefed the disclosure claims based on the preliminary proxy statement. Because
the relevant sections of the two proxy statements are identical, I base my analysis on the
preliminary proxy statement as well.
9
See Liston Aff. Ex. 5 (Cyan, Inc. Form 8-K (Aug. 3, 2015)), at 3 (49,311,592 shares
outstanding, 35,088,780 shares voted “for,” 836,900 voted “against,” and 90,044 shares
abstained). See also In re General Motors (Hughes) S’holder Litig., 897 A.2d 162, 170-
71 (Del. 2006) (holding that the Court of Chancery may take judicial notice of the result of
a stockholder vote approving transactions where there was no reasonable dispute about the
vote).
13
Plaintiffs nevertheless did not file a motion for expedition or preliminary injunctive
relief.
On July 15, 2016, almost one year after the Merger closed, plaintiffs filed the
Verified Third Amended Class Action Complaint, asserting two claims. Count I
asserts that the seven members of Cyan’s board breached their fiduciary duties in
connection with their approval of the Merger. Count II asserts that defendants
withheld material information that prevented Cyan’s stockholders from determining
“whether to pursue their statutory appraisal rights,”10 and asks the Court to award
the remedy of quasi-appraisal.
On July 19, 2016, defendants filed a motion to dismiss the Complaint under
Court of Chancery Rule 12(b)(6) for failure to state a claim for relief. On February
6, 2017, after observing that plaintiffs had asserted a lengthy list of alleged disclosure
deficiencies in their opposition brief, the Court asked plaintiffs to file a letter before
the hearing on the motion to dismiss “identifying what plaintiffs believe are their
three strongest disclosure claims.”11 Plaintiffs’ counsel did so later that same day.
II. ANALYSIS
The standards governing a motion to dismiss for failure to state a claim for
relief are well settled:
10
Compl. ¶ 136.
11
Letter to Counsel (Tr. ID 60164357 Feb. 6, 2017).
14
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are “well-pleaded” if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the “plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.”12
Although the standard is a minimal one, the Court “will not credit conclusory
allegations or draw unreasonable inferences in favor of the Plaintiffs.”13 The Court
also “is not required to accept every strained interpretation of the allegations
proposed by the plaintiff.”14
For the reasons explained below, I conclude that Count I for breach of
fiduciary duty must be dismissed for two independent reasons. First, plaintiffs have
failed to plead sufficient facts to support a reasonable inference that the directors of
Cyan breached their duty of loyalty or acted in bad faith in connection with the
Merger. Second, a majority of disinterested stockholders of Cyan approved the
Merger in a fully informed, uncoerced vote. Thus, under Corwin v. KKR Financial
Holdings LLC and its progeny, the transaction can only be attacked on the ground of
waste, which plaintiffs do not allege.15
12
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (internal citations omitted).
13
In re BJ’s Wholesale Club, Inc. S’holders Litig., 2013 WL 396202, at *5 (Del. Ch. Jan.
31, 2013).
14
Gen. Motors (Hughes), 897 A.2d at 168.
15
See Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 308-09 (Del. 2015); Singh v.
Attenborough, 137 A.3d 151, 151-52 (Del. 2016).
15
I also conclude that dismissal of Count II for quasi-appraisal logically follows
from the dismissal of Count I. As an initial matter, plaintiffs’ request for quasi-
appraisal is premised on disclosure deficiencies alleged in the Complaint but, as
discussed below, the former stockholders of Cyan were not deprived of any material
information in deciding whether to seek appraisal. The cause of action underlying
the quasi-appraisal remedy that plaintiffs seek, moreover, is in reality a claim for
breach of the fiduciary duty of disclosure. Because plaintiffs have failed to state a
non-exculpated claim for breach of fiduciary duty, they cannot obtain quasi-
appraisal as a remedy.
A. Plaintiffs Fail to Plead a Non-Exculpated Breach of Fiduciary Duty
Under the Merger Agreement, the former stockholders of Cyan received 89%
of the merger consideration in the form of Ciena common stock and the rest in cash.
Because the merger consideration primarily consisted of stock in a publicly traded
company, enhanced scrutiny under Revlon16 does not apply, as plaintiffs sensibly
concede.17 Plaintiffs also do not allege that the transaction triggers Unocal or should
16
Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986).
17
Pls.’ Answering Br. 48. See In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71
(Del. 1995) (internal quotations and citations omitted) (holding that enhanced scrutiny
under Revlon did not apply to the transaction where 67% of merger consideration was to
be paid to stockholders in the form of publicly traded stock in the surviving company and
explaining that plaintiffs had “failed to allege that control of Burlington and Santa Fe after
the merger would not remain in a large, fluid, changeable and changing market.”).
16
be subject to the entire fairness review ab initio.18 Thus, the business judgment rule
presumptively applies to the Court’s review of the transaction, and the Court will
not second-guess a board’s decision unless that decision “cannot be attributed to any
rational business purpose.”19
Cyan’s certificate of incorporation contained an exculpatory provision
permitted under 8 Del. C. § 102(b)(7).20 Accordingly, to survive the motion to
dismiss, plaintiffs must state a claim that a majority of defendants acted in bad faith
or otherwise breached their duty of loyalty.21 As this Court stated in Orman v.
Cullman, where self-dealing is not involved, one must allege facts from which it
reasonably may be inferred that a director’s interest in a transaction is material to
that director in order to sustain a claim for breach of the duty of loyalty:
in the absence of self-dealing, it is not enough to establish the interest
of a director by alleging that he received any benefit not equally shared
by the stockholders. Such benefit must be alleged to be material to that
director. Materiality means that the alleged benefit was significant
18
See Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002) (“Usually, the entire fairness
standard only applies at the outset (‘ab initio’) in certain special circumstances, viz, a
squeeze out merger or a merger between two companies under the control of a controlling
shareholder.”).
19
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
20
Liston Aff. Ex. 8, at 5 Article 8.1 (“To the fullest extent permitted by the DGCL, as it
presently exists or may hereafter be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.”). See Khanna v. McMinn,
2006 WL 1388744, at *30 (Del. Ch. May 9, 2006) (“[T]he Court may take judicial notice
of matters that are not subject to reasonable dispute.”).
21
See In re NYMEX S’holder Litig., 2009 WL 3206051, at *6 (Del. Ch. Sept. 30, 2009).
17
enough in the context of the director’s economic circumstances, as to
have made it improbable that the director could perform her fiduciary
duties to the . . . shareholders without being influenced by her
overriding personal interest.22
Well-pleaded allegations that the board did not act in good faith also would
state a claim for breach of the duty of loyalty sufficient to survive a motion to
dismiss. In general, “bad faith will be found if a fiduciary intentionally fails to act
in the face of a known duty to act, demonstrating a conscious disregard for his
duties,”23 or if “the decision under attack is so far beyond the bounds of reasonable
judgment that it seems essentially inexplicable on any ground other than bad faith.”24
After carefully reviewing the allegations in the Complaint, I conclude that
plaintiffs have failed to plead sufficient facts to support a reasonable inference that
a majority of Cyan’s board were interested in the Merger or acted in bad faith.
1. Plaintiffs Fail to Plead Sufficient Facts Supporting a
Reasonable Inference that a Majority of Cyan’s Board Was
Interested in the Transaction
Plaintiffs identified in their brief three sources of conflicts that allegedly
rendered members of Cyan’s board interested in the Merger. I address each in turn.
First, plaintiffs allege that all of Cyan’s directors were “conflicted because
they were motivated to secure a buyer with deep pockets to ensure they would be
22
Orman, 794 A.2d at 23 (internal quotations omitted).
23
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009).
24
Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963, 981 (Del. Ch. 2000).
18
indemnified from the high litigation exposure associated with the Cyan Securities
Litigation due to the Company’s uncertain cash position.”25 According to plaintiffs,
the damages exposure in the Securities Litigation is “roughly $141 million” based
on the drop in Cyan’s stock price during the relevant period ($2.88 per share)
multiplied by total number of shares outstanding shortly before the Merger.26 Thus,
according to plaintiffs, “a judgment in the Securities Class Action could crush the
Company’s fragile financial condition and . . . the Board was substantially motivated
to approve the Transaction to ensure they would in fact be indemnified.”27
There is a significant and indisputable flaw in this theory. Plaintiffs overlook
the fact that not all stockholders of Cyan at the time of the Merger could be members
of the class certified in the Securities Litigation, which concerns disclosures Cyan
made in connection with its initial public offering.28 As disclosed in its Form 10-K
25
Compl. ¶ 83.
26
Tr. Oral Arg. 76 (Feb. 7, 2017); see also Compl. ¶ 35.
27
Pls.’ Answering Br. 35.
28
The class in the Securities Litigation is defined as: “All persons who purchased or
otherwise acquired Cyan common stock from May 9, 2013 to November 4, 2013, except
for purchases or acquisitions of non-registered shares in a private transaction,” and
excluding certain affiliates of the defendants and any person who validly requests exclusion
from the class. Beaver Cty. Empls. Ret. Fund, No. CGC-14-538355 (Cal. Super. Ct. May
19, 2015) (ORDER). “May 9, 2013” is “the date of the initial public offering,” and “Cyan
has represented . . . that non-IPO shares first traded on November 5, 2013.” Pls.’
Supplemental Filing in Support of Class Certification 2, in Beaver Cty. Empls. Ret. Fund
(Apr. 7, 2015). See Khanna, 2006 WL 1388744, at *30 (“[T]he Court may take judicial
notice of matters that are not subject to reasonable dispute.”).
19
for the fiscal year 2014, Cyan sold 8.899 million shares of common stock in the
initial public offering.29 Assuming all purchasers or acquirers of Cyan common
stock issued in the initial public offering are class members in the Securities
Litigation, and accepting as true the alleged damages exposure of $2.88 per share—
which plaintiffs admit is the maximum exposure30—the total amount of damages
that could result from the Securities Litigation is approximately $25.6 million—not
$141 million.31
Putting aside that securities litigation rarely leads to a 100% recovery, when
the maximum exposure from the Securities Litigation is put in proper perspective, it
is not reasonably conceivable in my view from the facts alleged in the Complaint
that the directors of Cyan had a disabling conflict of interest when they approved the
Merger based on their alleged desire to “ensure there would be sufficient cash so
they will continue to be indemnified.”32 This conclusion is based on the following:
(1) Cyan is obligated to indemnify the board members;33 (2) the board members also
29
Cyan, Inc., Form 10-K (Mar. 27, 2015), at 47, available at
https://www.sec.gov/Archives/edgar/data/1391636/000139163615000042/cyni-
12312014x10k.htm#s3DFFE08A6EAFD5E1D6FCBBAE710D3FE6.
30
Tr. Oral Arg. 79, 102.
31
The first time defendants quantified the maximum exposure in the Securities Litigation
at approximately $25.6 million was during oral argument. The Court thus permitted
plaintiffs to make a supplemental submission if they disagreed with the calculation. Tr.
Oral Arg. 108. Plaintiffs did not do so.
32
Compl. ¶ 4.
33
Compl. ¶ 35.
20
are protected by D&O insurance;34 (3) Cyan had cash and cash equivalents of $53.87
million as of March 31, 2015,35 and its operational results were improving before the
Merger;36 (4) there were other deep pockets from which plaintiffs in the Securities
Litigation could obtain recovery apart from Cyan, such as Jefferies, Goldman Sachs,
J.P. Morgan Securities, and Pacific Crest Securities;37 (5) plaintiffs have not
identified any documentary evidence or pled any specific facts from the discovery
they obtained suggesting that the exposure from the Securities Litigation motivated
the board’s approval of the Merger; and (6) plaintiffs have not pled any non-
conclusory facts to support the assertion that Ciena was a “deeper pocket” than
Cyan—information that would be readily available from public sources. 38 Indeed,
plaintiffs’ theory is further undermined by the fact that, if Cyan truly lacked
sufficient capital to satisfy the contractual indemnification obligations it owed to the
defendants, as plaintiffs allege, any consideration its stockholders received in the
Merger would amount to a windfall.
34
See Liston Aff. Ex. 1, at 131, A-43 § 5.05 (c) (provision in the Merger Agreement
requiring Ciena to continue the Cyan directors’ existing liability insurance policies or
obtain new policies).
35
Compl. ¶ 84.
36
See Compl. ¶¶ 56, 73-78.
37
See Compl. ¶ 32; Tr. Oral Arg. 81 (“It’s joint and several liability under the securities statute.”).
38
Tr. Oral Arg. 82-83.
21
Second, plaintiffs allege that Haque and Ferris, as affiliates of Cyan’s two
largest stockholders (Norwest and Azure), had interests “not aligned with other Cyan
stockholders because their holdings are so sizable that the Transaction is their only
opportunity to cash out without the scrutiny of the public markets.”39 This Court
rejected a similar argument in In re Synthes, Inc. Shareholder Litigation, where the
plaintiffs argued that Synthes, Inc.’s Chairman of the Board, who also was the
company’s controlling stockholder, “received liquidity benefits that were not shared
equally with the rest of the stockholders and colored his decision to support the
Merger.”40 Then-Chancellor Strine rejected the argument, explaining:
Generally speaking, a fiduciary’s financial interest in a transaction as a
stockholder (such as receiving liquidity value for her shares) does not
establish a disabling conflict of interest when the transaction treats all
stockholders equally, as does the Merger. This notion stems from the
basic understanding that when a stockholder who is also a fiduciary
receives the same consideration for her shares as the rest of the
shareholders, their interests are aligned.
...
It may be that there are very narrow circumstances in which a
controlling stockholder’s immediate need for liquidity could constitute
a disabling conflict of interest irrespective of pro rata treatment. Those
circumstances would have to involve a crisis, fire sale where the
controller, in order to satisfy an exigent need (such as a margin call or
default in a larger investment) agreed to a sale of the corporation
without any effort to make logical buyers aware of the chance to sell,
give them a chance to do due diligence, and to raise the financing
39
Compl. ¶ 86.
40
In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1034 (Del. Ch. 2012).
22
necessary to make a bid that would reflect the genuine fair market value
of the corporation.41
Plaintiffs do not allege that Norwest or Azure received different consideration for
their shares than other stockholders of Cyan, nor do they allege that Norwest or
Azure had any “immediate need for liquidity” that amounted to “a crisis” or “fire
sale.” Therefore, consistent with Synthes, plaintiffs’ bare allegation that Norwest
and Azure wanted to “cash out without the scrutiny of the public markets” is
insufficient to support a reasonable inference that Haque or Ferris faced a disabling
conflict of interest in approving the Merger.42
Third, plaintiffs allege that Floyd, Hatfield, and Haque were “motivated to
ensure a transaction occurred so they could either receive the make-whole payment
from the convertible notes in connection with a fundamental change or in the
alternative, keep the convertible notes outstanding, but tied to a much more
financially secure company.”43 In the case of Haque, this alleged motivation
concerned convertible notes held by Norwest, where Haque served as co-CEO and
the senior managing partner.44
41
Id. at 1035-36.
42
See In re Zale Corp. S’holder Litig., 2015 WL 5853693, at *9 (Del. Ch. Oct. 1, 2015)
(“Although there are cases in which a plaintiff’s allegations of a large stockholder’s need
for liquidity have been sufficient to defeat a motion to dismiss, the plaintiffs in those cases
alleged much more specific liquidity needs than a simple desire to ‘sell quickly.’”).
43
Compl. ¶ 84.
44
Compl. ¶¶ 44, 47.
23
Plaintiffs’ contention that the desire to obtain the make-whole payment
created a material conflict of interest is open to serious question given that each of
these individuals held (or indirectly benefitted from) a significant amount of Cyan
stock and thus were motivated to maximize the exchange ratio in Cyan’s favor.
Specifically, the Complaint alleges that Floyd, Hatfield, and Norwest held,
respectively, 0.83%, 4.76%, and 22.71% of Cyan’s outstanding shares.45 But even
assuming that the interests of Floyd, Hatfield, and Haque in triggering the make-
whole payment outweighed their interests in maximizing the exchange ratio and
were material, this allegation only concerns three of the seven members of Cyan’s
board and does not show that a majority of Cyan’s board faced disabling conflicts
of interest in approving the Merger.46
2. Plaintiffs Fail to Plead Sufficient Facts Supporting a
Reasonable Inference that a Majority of Cyan’s Board Acted
in Bad Faith
Plaintiffs’ sole allegation of bad faith is based on defendants’ refusal to
supplement the Proxy after receiving a July 20, 2015 letter from plaintiffs’ counsel
asking them to do so shortly before the stockholder meeting to consider the Merger
45
Compl. ¶¶ 19-21.
46
The Complaint also alleged that Hatfield and Floyd “will be rewarded with lucrative
executive positions at Ciena upon the close of the Merger; with Hatfield most likely
becoming Senior Vice President at Ciena.” Compl. ¶ 88. But plaintiffs did not pursue this
argument in briefing (or at oral argument) and thus waived it. Emerald P’rs v. Berlin, 726
A.2d 1215, 1224 (Del. 1999) (“Issues not briefed are deemed waived.”).
24
was held on July 31.47 As discussed below, none of plaintiffs’ disclosure allegations
has merit, thus the Cyan board’s refusal to supplement the Proxy as requested by
plaintiffs cannot amount to bad faith.
Even if reasonable minds could differ over the merits of plaintiffs’ disclosure
allegations, furthermore, the Complaint contains no non-conclusory allegation that
could support a reasonable inference that the Cyan board members demonstrated “a
conscious disregard for [their] duties,”48 or that the decision not to supplement the
Proxy was “so far beyond the bounds of reasonable judgment that it seems
essentially inexplicable on any ground other than bad faith.”49
*****
For the reasons explained above, plaintiffs have failed to state a non-
exculpated breach of fiduciary duty claim against defendants. Count I thus must be
dismissed.
B. A Majority of Disinterested Stockholders of Cyan Approved the
Merger in a Fully Informed, Uncoerced Vote
As a second and independent ground for dismissal of Count I, defendants seek
to invoke the cleansing effect flowing from a fully informed, uncoerced stockholder
vote under Corwin and its progeny.
47
See Pls.’ Answering Br. 33-34.
48
Lyondell, 970 A.2d at 243.
49
Crescent/Mach I P’rs, L.P., 846 A.2d at 981.
25
In Corwin, the Delaware Supreme Court held that “when a transaction not
subject to the entire fairness standard is approved by a fully informed, uncoerced
vote of the disinterested stockholders, the business judgment rule applies.”50 The
fundamental policy underlying Corwin is to avoid “judicial second-guessing when
the disinterested stockholders have had the free and informed chance to decide on
the economic merits of a transaction themselves.” 51 Later, in Singh v. Attenborough,
our Supreme Court further explained that: “When the business judgment rule
standard of review is invoked because of a vote, dismissal is typically the result.
That is because the vestigial waste exception has long had little real-world relevance,
because it has been understood that stockholders would be unlikely to approve a
transaction that is wasteful.”52
Here, plaintiffs do not allege that the stockholder vote on the Merger was
coerced or that the Merger failed to receive the approval of a disinterested majority
of stockholders. The Corwin doctrine thus applies if the stockholder vote approving
the Merger was fully informed.
“[D]irectors of Delaware corporations are under a fiduciary duty to disclose
fully and fairly all material information within the board’s control when it seeks
50
Corwin, 125 A.3d at 308-09.
51
Id. at 313.
52
Singh, 137 A.3d at 151-52.
26
shareholder action.”53 A fact is material if “there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to vote.”54
Stated differently, material facts are those that, if disclosed, would “significantly
alter the ‘total mix’ of information made available.”55
“The application of [the materiality] standard does not require a blow-by-blow
description of events leading up to the proposed transaction. That is, the directors
are ‘not required to disclose all available information,’ but only that information
necessary to make the disclosure of their recommendation materially accurate and
complete.”56 “[A] plaintiff challenging the decision to approve a transaction must
first identify a deficiency in the operative disclosure document, at which point the
burden would fall to defendants to establish that the alleged deficiency fails as a
matter of law in order to secure the cleansing effect of the vote.”57
Although the Complaint lists something in the neighborhood of twenty
disclosure deficiencies, all but one of which plaintiffs had identified before the
53
Stroud v. Grace, 606 A.2d 75, 84 (Del. 1992).
54
Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985) (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
55
Arnold v. Soc’y for Sav. Bancorp, 650 A.2d 1270, 1277 (Del. 1994).
56
Matador Capital Mgmt. Corp. v. BRC Hldgs, Inc., 729 A.2d 280, 295 (Del. Ch. 1998)
(internal citation omitted).
57
In re Solera Hldgs, Inc. S’holder Litig., 2017 WL 57839, at *8 (Del. Ch. Jan. 5, 2017).
27
Merger,58 plaintiffs tellingly did not believe the deficiencies were serious enough to
warrant seeking an injunction to prevent an allegedly uninformed stockholder vote.
In any event, by letter dated February 6, 2017, plaintiffs identified their “three
strongest disclosure claims,” which I address below.
1. Jefferies’ Conflicts of Interest
Plaintiffs allege that the Proxy is “materially misleading as to the Board’s
acknowledgement of Jefferies’ conflict of interest in giving advice on a strategic
transaction.”59 Specifically, plaintiffs assert that:
(a) The Proxy and Amended S-4 incorrectly state that during the
January 27, 2015 Board meeting it was noted that the notes ‘could’
result in Jefferies having an interest in the outcome of a strategic
transaction, but the minutes of that meeting acknowledge that Jefferies
‘would’ have an interest in such an outcome.
(b) The Proxy and Amended S-4 fail to disclose that [the General
Counsel of Cyan] noted that the Committee and, eventually the full
Board, would want to consider these factors [i.e., that (1) Jefferies had
purchased convertible notes and related warrants and (2) is a defendant
in the securities litigation related to the Company’s IPO and that the
Company was indemnifying Jefferies] in connection with evaluating
the advice and, if applicable, any fairness opinion by Jefferies.60
58
See Compl. ¶¶ 103-15. Plaintiffs’ counsel sent a letter to defendant’s counsel on July
20, 2015, asserting a list of disclosure deficiencies substantially similar to those asserted in
the Complaint. See Verified Second Am. Class Action Compl. Ex. A. The only disclosure
deficiency in the Complaint that was not identified in the July 20 letter concerns one aspect
of Jefferies’ financial analysis. See Compl. ¶ 108. The stockholders meeting to consider
approving the Merger was held on July 31, 2015.
59
Compl. ¶ 113.
60
Id. (emphasis added).
28
Assuming arguendo that the Proxy inaccurately characterized the board’s
assessment as of its January 27, 2015 meeting concerning the nature of Jefferies’
interest in the Merger due to its convertible note holdings,61 and that the Proxy
omitted the comment Cyan’s General Counsel made on the subject at that meeting,
those deficiencies are immaterial. In my view, the information about Jefferies that
plaintiffs assert should have been disclosed would not “significantly alter the ‘total
mix’ of information made available” 62 to Cyan’s stockholders given the extensive
disclosures concerning Jefferies’ potential conflicts of interest that were included in
the Proxy, including the following:
On January 27, 2015 . . . [t]he committee then reviewed the terms of a
proposed engagement letter to formally engage Jefferies as Cyan’s
financial advisor for a potential strategic transaction. Management and
the committee discussed that, in connection with the backstop provided
by Jefferies at Cyan’s request in Cyan’s convertible debt and warrants
offering in December 2014, Jefferies had purchased, and held, $5.5
million of Cyan’s 8% convertible notes and related warrants and, as
such, could have an interest in the outcome of a strategic transaction in
addition to the fee arrangement from its financial advisory engagement.
The committee also noted that as a result of certain securities litigation
related to the Company’s initial public offering, Jefferies was being
indemnified by Cyan from potential liabilities in connection with that
litigation. The committee discussed these factors and concluded that
they would not present a conflict of interest that would preclude
61
Defendants also make a persuasive argument that it was appropriate for the Proxy to say
that Jefferies “could” rather than “would” have an interest in the transaction as of January
27, 2015, because the transaction that was under discussion at that time was a purely stock-
for-stock merger that would not result in a “Fundamental Change” under the indenture and
thus would not trigger the make-whole payment for the convertible notes. Tr. Oral Arg.
45.
62
Arnold, 650 A.2d at 1277.
29
Jefferies from rendering advice and, if applicable, an opinion in
connection with a transaction, and authorized management to execute
an engagement letter with Jefferies on the terms discussed with the
committee.63
...
On April 28, 2015 . . . [t]he Strategic/Finance Committee then discussed
the fact that given that Jefferies held convertible notes and warrants and
because Ciena proposed to structure the transaction to result in a
“Fundamental Change” which would trigger additional rights of the
holders of convertible notes, Jefferies may be deemed to have an
interest in the transaction. The Strategic/Finance Committee therefore
determined it would be advisable to contact an additional disinterested
financial advisor to perform an analysis with respect to the fairness,
from a financial point of view, of the per share merger consideration to
be received by the holders of Cyan common stock in the proposed
transaction. After further discussion, the Strategic/Finance Committee
authorized management to contact Houlihan Lokey to determine if
Houlihan Lokey would perform such an analysis and prepare a written
opinion to the Cyan board as to the fairness, from a financial point of
view, of the per share merger consideration to be received by the
holders of Cyan common stock in the merger, pursuant to the proposed
terms of the merger agreement and its analysis thereof.64
...
Jefferies and its affiliates in the past have provided financial advisory
and financing services unrelated to the mergers to Cyan, including,
during the two-year period prior to the date of its opinion, having acted
as an underwriter for the initial public offering of Cyan common stock
in 2013 and as sole bookrunning manager in 2014 for an offering of the
convertible notes in the aggregate principal amount of $50 million and
the related warrants to purchase shares of Cyan common stock for
which services during such two-year period Jefferies and its affiliates
received an aggregate fee of approximately $3.0 million. As the Cyan
63
Liston Aff. Ex. 1, at 77-78.
64
Id. at 85.
30
board was aware, as of the date of Jefferies’ opinion, Jefferies held
approximately $5.5 million (representing approximately 11%) of the
aggregate principal amount of the convertible notes and approximately
1,237,500 of the related warrants and that certain rights in respect of
such convertible notes and warrants (including conversion rights and
make-whole payments with respect to such convertible notes and
exercisability in the case of such warrants) would be triggered in the
event the merger is consummated. As the Cyan board also was aware,
as of the date of Jefferies’ opinion, such convertible notes and related
warrants would have an implied convertible value upon consummation
of the merger of approximately $12.2 million assuming Jefferies does
not exercise its conversion rights and approximately $13.8 million
assuming Jefferies exercises its conversion rights, in each case,
inclusive of Jefferies’ initial $5.5 million investment.65
As the above quotation demonstrates, the Proxy disclosed in detail Jefferies’
holding of the convertible notes, the implied value of the notes upon consummation
of the Merger, the fact that Jefferies was indemnified by Cyan in the Securities
Litigation, and the Strategic/Finance Committee’s decision to hire an additional
financial advisor for a second fairness opinion after it had become apparent that the
proposed transaction had been structured to result in a “Fundamental Change”
thereby triggering the make-whole payment. Under these circumstances, it is not
reasonably conceivable in my view that the word choice of “could” versus “would,”
and the comment of Cyan’s General Counsel that described substantially similar
information already disclosed elsewhere in the Proxy, would significantly alter the
total mix of information made available to Cyan’s stockholders.
65
Id. at 99.
31
2. Cyan’s Dependence on Windstream
Plaintiffs next argue that the Proxy failed to disclose the importance of
revenues from Cyan’s largest customer, Windstream, to the management projections
contained in the Proxy. According to plaintiffs, “the Proxy and Amended S-4 fail to
disclose the fact that the recent Windstream order substantially affected the
Company’s future performance and that the loss of that income would have a
significant negative impact on Cyan.”66 This information, however, is adequately
disclosed in the Proxy and documents expressly incorporated therein.
Under the section entitled “Cyan Management Projections,” the Proxy
disclosed the following:
Important factors that may affect actual results and cause the
Management Projections not to be achieved include . . . changes in the
buying pattern of Cyan’s largest customer . . . Previous versions of the
Management Projections (other than the Tax Projections) provided to
Ciena and Cyan’s board and Jefferies were updated in order to reflect
the improving revenue outlook between the third quarter of 2014 and
the second quarter of 2015 resulting almost exclusively from two
significant unforecasted orders Cyan received from its largest customer
in the first and second quarters of 2015. Given that the specific orders
driving business were to be fulfilled in 2015 and management did not
have any visibility to any other specific drivers for revenues to continue
at the higher levels in 2016 and beyond, the figures relating to 2016-
2019 did not change in any material respect in the previous versions
provided.67
66
Compl. ¶ 112.
67
Liston Aff. Ex. 1, at 108.
32
Three paragraphs later, the Proxy further stated:
The Management Projections are forward-looking statements. For
information on factors that may cause Cyan’s future results to
materially vary, see the information described in the sections entitled
“Risk Factors” in Cyan’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2014, Cyan’s Quarterly Report on Form 10-
Q for the period ended March 31, 2015, and in other documents
incorporated by reference into this proxy statement/prospectus.68
The “Risk Factors” sections of Cyan’s Form 10-K for the 2014 fiscal year and
Form 10-Q for the first quarter of 2015 contain substantially identical disclosures
concerning Cyan’s dependence on Windstream.69 In fact, the first item disclosed in
the “Risk Factors” section in both forms is Cyan’s dependence on Windstream. The
Form 10-Q for the first quarter of 2015, for example, disclosed the following, with
the emphasis in the original:
We currently generate the majority of our revenue from a
concentrated base of customers, including Windstream Corporation.
Unless we can substantially expand our sales to other existing or new
customers, our period-to-period revenue may be highly volatile and
we will not be able to grow our revenue.
For the years ended December 31, 2014, 2013 and 2012, revenue from
Windstream represented approximately 29%, 39% and 45% of our total
revenue. In recent periods, sales to Windstream have been highly
volatile from quarter to quarter. For example, sales to Windstream
declined from $19.0 million, or 50% of total revenue, in the third
quarter of 2013 to $2.3 million, or 11% of total revenue, in the fourth
68
Id. at 109; see also id. at 45.
69
The major difference between the relevant disclosures in the 10-K and 10-Q referenced
above is that the 10-Q also disclosed certain information relating to Cyan’s revenue from
Windstream during the first quarter of 2015.
33
quarter of 2013 and to $1.1 million, or 6% of total revenue, in the first
quarter of 2014. The unanticipated 88% decline in revenue from
Windstream from the third to the fourth quarters of 2013 resulted in our
overall revenue in the fourth quarter of 2013 being substantially lower
than we or the market anticipated. In the third quarter of 2014, sales to
Windstream decreased to $5.6 million or 21% of total revenue from
$6.7 million, or 28% of total revenue in the second quarter of 2014, but
increased to $15.8 million or 52% in the fourth quarter of 2014 and
$16.9 million or 47% in the first quarter of 2015.
While our sales to Windstream have been volatile, and can be
potentially highly volatile, from quarter to quarter, we nonetheless
anticipate that a significant portion of our revenue in 2015 and beyond
will continue to depend on sales to Windstream especially as we have
been selected by Windstream for additional upgrades to its regional and
metro networks across major markets to 100G capacity. If our sales to
Windstream decrease materially in any period, our revenue and results
of operations would be adversely affected.
...
Sales of our solutions to our customers, including Windstream, are
made pursuant to purchase orders, and not pursuant to long-term,
committed-volume purchase contracts. As a result, we cannot assure
you that we will be able to sustain or increase sales to any current or
future customer from period to period, or that we will be able to offset
the discontinuation of concentrated purchases by these customers with
purchases by new or other existing customers. As a consequence of our
customer concentration and the frequently concentrated nature of our
customers’ purchases, our quarterly revenue and operating results may
fluctuate substantially from quarter to quarter and are difficult to
predict. The loss of, or a significant delay or reduction in purchases by,
any of our significant customers has in the past and could in the future
adversely affect our business and operating results.70
70
Cyan, Inc., Form 10-Q (May 13, 2015), at 32, available at
https://www.sec.gov/Archives/edgar/data/1391636/000139163615000055/cyni-
3312015x10q.htm (emphasis in original).
34
As plaintiffs acknowledge, this Court at times has considered materials
explicitly incorporated into a proxy statement to be part of the total mix of
information available to stockholders.71 It is appropriate to apply the “incorporation
by reference” doctrine here, in my view, because the language incorporating the
Form 10-K and Form 10-Q appears in a section of the Proxy where stockholders
reasonably would expect to find the relevant information, and because the
information was conspicuously laid out in the incorporated documents so that a
reasonable stockholder reading the Proxy could find it without difficulty.72 For these
reasons, plaintiffs’ disclosure challenge concerning Cyan’s dependence on
Windstream is without merit.73
71
Tr. Oral Arg. 95; see e.g., Orman, 794 A.2d at 34-35; Solera, 2017 WL 57839, at *10.
72
By contrast, if the incorporation and the disclosures in the incorporated documents are
“buried,” the Court may find the disclosure to be insufficient. See Vento v. Curry, 2017
WL 1076725, at *3-4 (Del. Ch. Mar. 22, 2017).
73
To the extent plaintiffs argue that the Proxy specifically should have disclosed that “the
2015 Momentum Plan” reflected a high degree of dependence on Windstream and that
Cyan received a $28 million purchase order from Windstream, I find that information to
be immaterial. See Pls.’ Answering Br. 19. The Proxy, the 10-K, and the 10-Q disclosed
that Cyan received “two significant unforecasted orders” “from its largest customer in the
first and second quarters of 2015,” that Cyan was highly dependent on revenues from
Windstream, its largest customer, and that the Windstream revenues had been volatile. The
further disclosure of the exact magnitude of a particular order from Windstream or the
name of a management plan (as opposed to management projections generally) would not
significantly alter the total mix of information.
35
3. Jefferies’ Precedent Transactions Analysis
The last of plaintiffs’ “three strongest disclosure claims” challenges the
omission from the Proxy of a “Selected Software & Network Management Precedent
Transactions” analysis that appeared in the appendix of a powerpoint presentation
Jefferies provided to the board on May 3, 2015.74 Plaintiffs do not dispute that the
Proxy accurately disclosed another precedent transactions analysis—entitled
“Selected Network Communications Precedent Transactions”—that Jefferies
performed from its review of “financial data relating to . . . 11 selected transactions
which Jefferies in its professional judgment considered generally relevant for
comparative purposes as transactions involving target companies with operations in
the network communications industry.”75
“[A] complaint may, despite allegations to the contrary, be dismissed where
the unambiguous language of documents upon which the claims are based contradict
the complaint’s allegations. Likewise, a claim may be dismissed if allegations in
the complaint or in the exhibits incorporated into the complaint effectively negate
the claim as a matter of law.”76 Under Delaware law, “[s]tockholders are entitled to
a fair summary of the substantive work performed by the investment bankers upon
74
See Compl. ¶ 107.
75
See Liston Aff. Ex. 1, at 96; Tr. Oral Arg. 96.
76
Amalgamated Bank v. Yahoo! Inc., 132 A.3d 752, 797 (Del. Ch. 2016).
36
whose advice the recommendations of their board as to how to vote on a merger or
tender rely.”77 “A fair summary, however, is a summary. By definition, it need not
contain all information underlying the financial advisor’s opinion or contained in its
report to the board.”78
As mentioned above, the “Selected Software & Network Management
Precedent Transactions” that is the subject of plaintiffs’ disclosure challenge
appeared in the appendix of Jefferies’ powerpoint presentation.79 Significantly, a
footnote right below that analysis stated: “Shown for informational purposes for
[Cyan] software business, for which revenue of $10M in 2015E and $21M in 2016E
is projected per [Cyan] management.”80 In other words, the “Selected Software &
Network Management Precedent Transactions” analysis was performed for
“informational purposes” for Cyan’s “software business,” which was projected to
77
In re Pure Res. Inc. S’holders Litig., 808 A.2d 421, 449 (Del. Ch. 2002).
78
In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 900 (Del. Ch. 2016) (emphasis in
original).
79
Project Cougar Presentation to Board of Directors (May 3, 2015) (hereinafter “Project
Cougar Presentation”) at 29, 30. A copy of the powerpoint was provided to the Court
during the motion to dismiss hearing, but it was incorporated by reference into the
Complaint. See Compl. ¶ 107; Amalgamated Bank, 132 A.3d at 797 (“The incorporation-
by-reference doctrine permits a court to review the actual document to ensure that the
plaintiff has not misrepresented its contents and that any inference the plaintiff seeks to
have drawn is a reasonable one.”).
80
Project Cougar Presentation at 30.
37
account for only 5% of Cyan’s total projected revenue of $200 million in 2015,81 as
opposed to for Cyan as a whole.
By contrast, the “Selected Network Communications Precedent Transactions”
analysis that Jefferies performed for Cyan as a whole appeared in the body of its
powerpoint presentation—not in the appendix.82 The numerical ranges derived from
that analysis, furthermore, appeared in the “Summary Financial Analysis” slide in
the powerpoint and are identical to the numerical ranges disclosed in the Proxy, 83
which confirms that Jefferies did not rely on the “Selected Software & Network
Management Precedent Transactions” analysis in rendering its fairness opinion.
Our case law only requires disclosure of a fair summary of a financial
advisor’s work. The Proxy fully and accurately disclosed the precedent transactions
analysis Jefferies performed to value Cyan as a whole. The failure to disclose a
supplemental analysis that concerned a small fraction (5%) of the company’s
estimated revenues and that the financial advisor ostensibly did not rely on in
81
See Liston Aff. Ex. 1, at 109 (projecting Cyan’s total revenue in 2015 to be $200 million).
82
See Project Cougar Presentation at 27; Liston Aff. Ex. 1, at 96; Tr. Oral Arg. 96.
83
Compare Project Cougar Presentation at 24 with Liston Aff. Ex. 1, at 96.
38
rendering its fairness opinion is not material in my view. Therefore, plaintiffs fail
to state a disclosure claim concerning Jefferies’ precedent transactions analysis.
*****
For the foregoing reasons, none of plaintiffs’ “three strongest” disclosure
claims is viable. Having reviewed the rest of plaintiffs’ disclosure claims, most of
which are of the “tell me more” variety and all of which are concededly weaker than
the three discussed above, I conclude that each of them also falls short of identifying
a material misrepresentation or omission and that the stockholder vote approving the
Merger was fully informed. Accordingly, and because plaintiffs do not assert that
the Cyan board’s decision to approve the Merger amounted to waste, Count I of the
Complaint must be dismissed for failure to state a claim for relief under Corwin and
its progeny.84
C. Count II Fails to State a Claim for Relief to Warrant the Imposition
of a Quasi-Appraisal Remedy
Count II of the Complaint, which is styled as a “Claim for Equitable Relief,”
seeks the “remedy of quasi-appraisal” based on the disclosure allegations in the
Complaint.85 Plaintiffs assert that by “withholding the critical and material
information detailed [in the Complaint],” defendants deprived the stockholders of
84
Attenborough, 137 A.3d at 151-52.
85
Compl. ¶¶ 134-38.
39
Cyan of “sufficient information to determine whether to pursue their statutory
appraisal rights.”86
In In re Orchard Enterprises, Inc. Stockholder Litigation, the Court explained
based on a thorough analysis of Delaware law that “quasi-appraisal” is simply a form
of remedy:
“Quasi-appraisal” is simply a short-hand description of a measure of
damages. It refers to the quantum of money equivalent to what a
stockholder would have received in an appraisal, namely the fair value
of the stockholder’s proportionate share of the equity of the corporation
as a going concern. . . . Because quasi-appraisal is a measure of
damages, different causes of action can give rise to a quasi-appraisal
remedy, just as different causes of action can give rise to other forms of
remedies.87
The Court further explained that “[o]ne cause of action where the Delaware Supreme
Court and the Court of Chancery consistently have held that quasi-appraisal
damages are available is when a fiduciary breaches its duty of disclosure in
connection with a transaction that requires a stockholder vote.” 88
As a threshold matter, because I have concluded that plaintiffs’ disclosure
allegations are without merit, plaintiffs’ request for the remedy of quasi-appraisal
based on those allegations must be dismissed as well. In addition, Count II must be
dismissed because the cause of action underlying the remedy sought is an alleged
86
Id. ¶ 136.
87
In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 42 (Del. Ch. 2014).
88
Id.
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breach of fiduciary duty and, as discussed above, plaintiffs have failed to plead a
non-exculpated claim for breach of fiduciary duty.
In an effort to circumvent the effect of the exculpatory provision in Cyan’s
certificate of incorporation, plaintiffs argue that their “equitable claim is for
frustration of the statutory right of appraisal, not breach of fiduciary duty.”89 Thus,
according to plaintiffs, the exculpatory provision in Cyan’s certificate of
incorporation, which only exculpates defendants from liability for “monetary
damages for breach of fiduciary duty as a director,”90 does not apply to Count II.
Plaintiffs’ argument runs counter to the well-reasoned conclusion in Orchard,
quoted above, that “quasi-appraisal” is simply a form of remedy. Indeed, plaintiffs
fail to identify a single case in Delaware that recognizes a cause of action for
“frustration of the statutory right of appraisal” under similar circumstances.91 I thus
see no basis to invent such a cause of action here.
As importantly, the allegations underlying Count II demonstrate, despite
plaintiffs’ protestations to the contrary, that the claim actually is predicated on the
89
Pls.’ Answering Br. 55.
90
Liston Aff. Ex. 8, at Article 8.1.
91
See Pls.’ Answering Br. 54-55; Tr. Oral Arg. 100.
41
theory that the defendants breached a fiduciary duty of disclosure. For example,
plaintiffs allege that:
Defendants further breached their fiduciary duties to Cyan
stockholders . . . when they filed the Proxy, recommending that
Cyan’s public stockholders vote in favor of the Merger. However,
as described herein, the S-4 and Proxy fail to disclose material
information to Company stockholders, in bad faith breach of the
Individual Defendants’ duty of candor. . . . As a result, Plaintiffs
and the class are entitled to a quasi-appraisal remedy.92
On June 30, 2015, Defendants caused to be filed the Proxy and the
Amended S-4 on June 26, 2015, which fails to disclose material
information and prevented stockholders from casting an informed
vote on whether to approve the Merger or seek appraisal.
Accordingly, Plaintiffs and the class are entitled to a quasi-
appraisal remedy.93
[T]he Individual Defendants breached their duty of candor by
failing to disclose to Plaintiffs and the Class all material information
and this prevented them from casting an informed vote on whether
to tender their shares into the Merger or seek appraisal rights. As a
result, Plaintiffs and the Class are entitled to a quasi-appraisal
remedy.94
When the cause of action supporting plaintiffs’ request for a quasi-appraisal remedy
is for breach of a fiduciary duty, plaintiffs cannot circumvent the protection afforded
92
Compl. ¶ 14 (emphasis added).
93
Id. ¶ 103 (emphasis added).
94
Id. ¶ 130 (emphasis added).
42
in Cyan’s certificate of incorporation through artful pleading.95 To hold otherwise
would undermine the very purpose of 8 Del. C. § 102(b)(7).
III. CONCLUSION
For the foregoing reasons, defendants’ motion to dismiss the Complaint with
prejudice is GRANTED.
IT IS SO ORDERED.
95
Cf. Simon v. Navellier Series Fund, 2000 WL 1597890, at *5 n.18 (Del. Ch. Oct. 19,
2000) (citing cases for the proposition that “artful pleading” designed to circumvent
enforcement of the parties’ contractual choice of forum is not permitted); Charlotte Broad.,
LLC v. Davis Broad. of Atlanta LLC, 2013 WL 1405509, at *3 (Del. Ch. Apr. 2, 2013)
(“artful pleading will not convert a legal matter into an equitable one.”).
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